Guidance on When to Estimate a Future Price Factor

The Federal Emergency Management Agency (FEMA) increasingly seeks fixed-price contracts for Public Assistance expenditures to help communities rebuild after disaster. FEMA and those communities have large incentives to estimate costs correctly before contracts are signed. One challenge to providing an accurate estimate of construction costs is that the cost of rebuilding can be affected by the reconstruction effort itself. One way to account for such changes is to use a future price forecast (FPF) factor, which adjusts a project's cost estimate to account for overall price-level increases caused by a disaster. The purpose of this study was to help FEMA identify when to use an FPF. To carry out the study, the authors convened panels of experts to discuss scenarios of hypothetical disasters-in particular, how these disasters could affect local economies. They also tested a variety of community and disaster-related measures that might be predictive of large cost increases and explored the relationship between different types of skills and labor-mobility variables and disaster effects on construction costs. They then estimated how often disasters cause large increases in construction costs and identified criteria to use in determining when an FPF might be warranted. They also explored the implications of these criterion thresholds by estimating FPFs in some what-if scenarios.